Monday, 7 October 2013

Eurozone crisis: Still bubbling away

The debt crisis in
Europe seems a long time ago but a political hiccup in Italy shows that its revival may not
be that far off.

Around this time last year, weeks would go by without this blog
commenting on anything but the Eurozone crisis.
The turning point came near the end of 2012 with a bit of imaginative
policy making by the European Central Banks who said they were willing to do “whatever it takes” to
save the euro. By the start of 2013, the
worst seemed to be over (Good and Bad in 2013),
but many of the problems still had to be fixed.
This year has seen the economic problems in Europe simmering away in the
background rather than being likely to erupt as in 2012. However, the turmoil in Italy at the moment
shows that it does not take much for things to heat up again. Europe may not dominate the headlines as in
the recent past but it is never too far from the front pages and here is a look
into why.

Politics in Italy are tricky at the best of times but an
election earlier this year left the country with a fragile coalition. A fresh saga was triggered as the constant
distraction that is Silvio Berlusconi looked to pull his support from the
government after being convicted of tax fraud in August. Yet it was Berlusconi who suffered from his
latest attempt at meddling as he was forced into a dramatic U-turn which involved
providing support to the government in order to avoid seeing his own party
rebel against him. After a jump in the
interest rate on Italian government bonds, the weakening of Berlusconi cheered
investors as he had held sway over Italian politics for a long time despite
Italy having not benefited much from his time in power.

Although Italy has avoided the unwelcome prospect of another
round of elections, the problems that the country faces are greater than the
immediate political woes (for some background, see Bigger than Berlusconi). This year, the government budget deficit is
expected to top 3%, which is the upper limit for EU countries, with government
debt approaching 130% of GDP. The
coalition government lacks the political capital to push through the necessary
reforms to get the economy moving ahead to help generate the tax revenues
needed to reduce the shortfall in the government’s finances.

Italy is hampered by a problem which is typical for
countries in Europe feeling the strain in the aftermath of the Eurozone crisis
– voters weary of austerity measures with little to show for their perseverance. Mainstream political parties who have been
pushing government cuts have seen their support eroded by fringe parties which
promise relief through policies which will have negative long term
effects. The democratic process has
struggled to deal with the consequences of the economic slump and mounting
debts following the global financial crisis. Voters have been stuck with two unappetizing options
– enduring the hardship of austerity with scant rewards or repelling against spending
restrictions but becoming an outcast in the financial system.

The same themes can be seen being
played out in Portugal and Greece among others. Greece has witnessed the rise of the far-right
extremist Golden Dawn party which has fed off the frustration of Greek voters. Local elections in Portugal resulted in heavy
losses for the ruling party who had pushed through austerity measures. Despite all the hardship endured in these two
countries, further bailouts are seen as necessary to deal with the stubbornly
high levels of government debt. The economic
stagnation in Europe continues with countries like Greece still suffering with
GDP down by 6.4% in 2013. Portugal,
Italy, and Spain among others also ended 2012 with lower GDP.

While the European Central Bank
has staved off the immediate threat of crisis, the flipside is that the
pressure for reforms has eased. As such,
politicians can no longer blame the financial markets for their unpopular
policies. Leadership in Europe has also
been lacking with the national elections in Germany drawing the attention of
Angela Merkel away from Europe.
Coalition negotiations in Germany following the elections in September will
leave Europe seemingly leaderless for a few more months. The Eurozone crisis may have been put on the
back burner but it could still boil over at any point if not watched.